What is Debt to Income Ratio from Bank of AmericaWondering what debt-to-income ratio is and why it's important? Let Bank of America explain and help you figure out how to lower your debt-to-income ratio.Understanding your debt-to-income ratioBank of Americadebt-to-income ratio, what is debt to income ratio, how to lower debt-to-income ratio

Keeping your debt at a manageable level is one of the foundations of good financial health. But how can you tell when your debt is starting to get out of control? Fortunately, there's a way to estimate if you have too much debt without waiting until realize you can't afford your monthly payments or your credit score starts slipping. What is debt-to-income ratio (DTI)? Your debt-to-income ratio (DTI) is a percentage that compares your monthly debt expenses to your monthly gross income. To calculate your debt-to-income ratio, add up all the payments you make toward your debt in an average month. That includes your monthly credit card payments, car loans, other debts (payday loans, investment loans) and housing expenses — either rent or the costs for your mortgage principal, plus interest, property taxes and insurance (PITI), and any homeowner association fees. Next, divide your monthly debt payments by your gross income per month (that’s your income BEFORE taxes are deducted). Multiply that number by 100 to get your debt-to-income ratio as a percentage. For example, if you pay $400 on credit cards, $200 on car loans and $1,400 a month in rent, your total monthly debt commitment is $2,000. If you make $60,000 a year, your monthly gross income is $60,000 divided by 12 months for a total of $5,000 a month. Your debt-to-income ratio is $2,000 divided by $5,000, which works out to 0.4 or 40%. Why is my debt-to-income ratio important? To put it simply: Because it’s important to lenders. Banks and other lenders study how much debt their customers can take on before those customers are likely to start having financial difficulties, and use this knowledge to set lending amounts. While the preferred maximum DTI varies from lender to lender, it’s often around 36%. How to lower debt-to-income ratio: If your debt-to-income ratio is close to or higher than 36%, you may want to take steps to reduce it: Increase the amount you pay monthly toward your debts. Extra payments can help lower your overall debt more quickly. Avoid taking on more debt. Consider reducing the amount you charge on your credit cards, and try to postpone applying for additional loans. Postpone large purchases until you have more savings. If you’re planning to make a large purchase via a loan or by using a credit card, you may want to consider waiting until you have more savings. If you make a larger down payment, for example, you’ll have to fund less of the purchase with credit, which can help keep your debt-to-income ratio low. Recalculate your debt-to-income ratio monthly to see if you are making progress. Watching your DTI ratio fall can help you stay motivated to keep your debt manageable. Keeping your debt-to-income ratio low will help ensure that you can afford your debt repayments and give you the peace of mind that comes from properly handling your financial responsibilities. It can also help you be more likely to qualify for credit for the things you really want in the future.

What is Debt to Income Ratio from Bank of AmericaWondering what debt-to-income ratio is and why it's important? Let Bank of America explain and help you figure out how to lower your debt-to-income ratio.debt-to-income ratio, what is debt to income ratio, how to lower debt-to-income ratio

Understanding your debt-to-income ratio

Could your debt be affecting your credit? Here’s how to tell if your debt is out of proportion for your income.

Keeping your debt at a manageable level is one of the foundations of good financial health. But how can you tell when your debt is starting to get out of control? Fortunately, there's a way to estimate if you have too much debt without waiting until you realize you can't afford your monthly payments or your credit score starts slipping.

What is debt-to-income ratio (DTI)?

Your debt-to-income ratio (DTI) is a percentage that compares your monthly debt expenses to your monthly gross income. To calculate your debt-to-income ratio, add up all the payments you make toward your debt in an average month. That includes your monthly credit card payments, car loans, other debts (for example, payday loans or investment loans) and housing expenses—either rent or the costs for your mortgage principal, plus interest, property taxes and insurance (PITI) and any homeowner association fees.

Next, divide your monthly debt payments by your gross income per month (that’s your income before taxes are deducted). Multiply that number by 100 to get your debt-to-income ratio as a percentage.

For example, if you pay $400 on credit cards, $200 on car loans and $1,400 a month in rent, your total monthly debt commitment is $2,000. If you make $60,000 a year, your monthly gross income is $60,000 divided by 12 months for a total of $5,000 a month. Your debt-to-income ratio is $2,000 divided by $5,000, which works out to 0.4 or 40%.

Why is my debt-to-income ratio important?

Because it's important to lenders. Banks and other lenders study how much debt their customers can take on before those customers are likely to start having financial difficulties, and they use this knowledge to set lending amounts. While the preferred maximum DTI varies from lender to lender, it’s often around 36%.

How to lower your debt-to-income ratio:

If your debt-to-income ratio is close to or higher than 36%, you may want to take steps to reduce it:

Avoid taking on more debt. Consider reducing the amount you charge on your credit cards, and try to postpone applying for additional loans.

Postpone large purchases until you have more savings. If you’re planning to make a large purchase via a loan or by using a credit card, you may want to consider waiting until you have more money in your savings account. If you make a larger down payment, for example, you’ll have to fund less of the purchase with credit, which can help keep your debt-to-income ratio low.

Recalculate your debt-to-income ratio monthly to see if you're making progress. Watching your DTI ratio fall can help you stay motivated to keep your debt manageable.

Keeping your debt-to-income ratio low will help ensure that you can afford your debt repayments and give you the peace of mind that comes from properly handling your financial responsibilities. It can also help you be more likely to qualify for credit for the things you really want in the future.